Arlington Asset Investment(AAIC) - 2023 Q2 - Quarterly Report

Financial Performance - Net income for the three months ended June 30, 2023, was $4.9 million, compared to a net income of$ 0.3 million for the same period in 2022 [218]. - Diluted earnings per common share for the three months ended June 30, 2023, was $0.15, compared to a loss of$ 0.01 for the same period in 2022 [218]. - Interest and other income increased by $3.9 million, or 44.3%, from$ 8.8 million for the three months ended June 30, 2022, to $12.7 million for the three months ended June 30, 2023 [218]. - Interest and other income for the six months ended June 30, 2023, rose by$ 10.5 million, or 64.8%, to $26.7 million compared to$ 16.2 million for the same period in 2022 [218]. - Interest expense increased by $3.7 million, or 82.2%, from$ 4.5 million for the three months ended June 30, 2022, to $8.2 million for the three months ended June 30, 2023 [223]. - The total interest expense for the six months ended June 30, 2023, was$ 16.5 million, up from $7.7 million for the same period in 2022, reflecting a 114.3% increase [223]. - Net income available to common stock for the three months ended June 30, 2023, was$ 4.2 million, compared to a loss of $0.4 million for the same period in 2022 [235]. - Non-GAAP earnings available for distribution for the six months ended June 30, 2023, were$ 3.7 million, up from $2.8 million in the same period of 2022, representing a 32% increase [235]. Investment Portfolio - The total invested capital as of June 30, 2023, was$ 450.5 million, with 66% allocated to MSR financing receivables, 11% to credit investments, and 23% to agency MBS [199]. - The agency MBS investment portfolio has a fair value of $467,503, with a net short TBA position of$ (343,236), resulting in a total portfolio value of $124,267 [207]. - The total credit investment portfolio as of June 30, 2023, is valued at$ 130,347, with a leverage ratio of 2.8 [205]. - The company holds two AAA rated senior position commercial MBS with a combined fair value of $99.6 million, secured by properties in New York and North Carolina [205]. - The average balance of agency MBS increased to$ 472.8 million, generating interest and other income of $5.0 million at a yield of 4.26% for the three months ended June 30, 2023 [219]. - The average balance of credit investments was$ 132.2 million, yielding $2.8 million at an 8.48% rate for the three months ended June 30, 2023 [219]. Market Conditions - The 10-year U.S. Treasury rate increased by 37 basis points to 3.84% as of June 30, 2023, contributing to a rise in residential mortgage rates, which reached 6.71% [193]. - The average primary mortgage rate from Freddie Mac increased by 39 basis points to 6.71% as of June 30, 2023, impacting the housing market [195]. - Housing prices declined by 0.5% annually as reported by the S&P CoreLogic Case-Shiller U.S. National Home Price NSA index in May 2023 [195]. - The Consumer Price Index (CPI) declined to 3.0% for the twelve-month period ending June 30, 2023, indicating a decrease in inflation from its peak in 2022 [195]. Risk Factors - The company is exposed to various market risks including interest rate risk, credit risk, and spread risk, which can significantly impact its financial position [261]. - Credit risk is present in the company's non-agency MBS investments, which do not carry a credit guarantee, exposing the company to potential credit losses [270]. - The company acknowledges that actual results may differ materially from estimates due to various market conditions and risks [265]. - The company is facing risks related to the proposed merger with EFC, including the need for shareholder approval and potential litigation risks [272]. - Current adverse conditions in the residential mortgage market and the overall economy could affect the company's performance [273]. Capital Structure - The company’s leverage ratio was reported at 0.5 as of June 30, 2023, reflecting the ratio of financing and commitments to investable capital [199]. - As of June 30, 2023, the debt-to-equity leverage ratio was 2.7 to 1, indicating a significant reliance on debt financing [238]. - Total repurchase agreements outstanding as of June 30, 2023, amounted to$ 499.9 million, with a weighted-average rate of 5.48% [243]. - The company had outstanding repurchase agreement balances with eight counterparties, with no more than 4.2% of stockholders' equity at risk with any one counterparty [245]. - As of June 30, 2023, the company had $86.6 million in total long-term unsecured debt, with$ 34.9 million in 6.75% Senior Notes due 2025 and $37.8 million in 6.00% Senior Notes due 2026 [246]. Strategic Decisions - The company no longer anticipates allocating capital to a single-family residential investment strategy after selling its SFR portfolio in 2022 [191]. - The company does not anticipate allocating capital to an SFR investment strategy going forward, having sold all SFR rental properties in 2022 [222]. - The company is exploring business expansion beyond mortgage-backed securities (MBS), with uncertain returns [273]. - The company intends to distribute 100% of its taxable income to shareholders, in compliance with REIT distribution requirements [257]. Operational Insights - General and administrative expenses include professional services, insurance, and non-recurring expenses related to the proposed merger with EFC [214]. - General and administrative expenses increased by$ 0.9 million from $3.8 million for the three months ended June 30, 2022, to$ 4.7 million for the same period in 2023, primarily due to non-recurring legal and professional service fees [230]. - The company incurred property operating expenses of $1.9 million for the three months ended June 30, 2022, including$ 0.6 million of depreciation expense [226]. - The company recognized a provision for income taxes of $1.4 million for the three months ended June 30, 2023, compared to$ 0.8 million for the same period in 2022 [231]. Future Outlook - The company expects substantial realization of remaining value from business purpose residential MBS within the next several quarters [205]. - The company anticipates that changes in prepayment rates and interest rates will affect its portfolio performance [271]. - The company acknowledges the potential economic impact of the COVID-19 pandemic on its operations [273].